What is verification on cryptocurrency exchanges? Pros and cons of the procedure KYC / ALM

Customer identification is a big problem today for technology companies, financial institutions and government agencies. This problem is no less acute for crypto-industry: on the one hand, it is necessary to respect the necessary privacy and protect user data from hacking and the “third party”, on the other – something must be done to increase cryptocurrency fraud.

The KYC / AML rules, offering their solution to the problem of identification, ensure the acceptance of cryptocurrency in society, but at the same time, they cause a conflict between users and regulators.

Let's look at what this contradiction is, what the rules themselves are, how to get verified on a cryptocurrency exchange and comply with all the rules of KYC / AML.

GDPR rules

Global regulation of the cryptoindustry does not exist. Each country develops its own set of laws and regulations. At the same time, the G-20 Financial Stability Board, the International Monetary Fund, the US Securities and Exchange Commission (SEC) and many other regulators are seeking to find a consensus that would allow uniformity of regulatory control in the cryptocurrency ecosystem.

One such example is the General Data Protection Statement (GDPR), which is aimed at unifying user data protection standards in the European Union (EU) countries. GDPR entered into force recently – May 25, 2018. Thus, in accordance with the regulations, users and organizations must comply with the standards of KYC / AML (know your client / money laundering), designed to ensure the security of customer data.

Currently, the United States, the United Kingdom, and many other countries have also made the KYC and AML rules an integral part of their legal cryptocurrency databases.

However, the KYC and AML standards are also a major obstacle to cryptographic protection, since they contradict one of the fundamental ideas of the blockchain – anonymity. In other words, cryptocurrency transactions must be anonymous and inaccessible for tracking. But since regulators are concerned about the problem of cybercrime, it is anonymity that causes them an intolerable migraine. That is why it is now increasingly common to pass verification on cryptocurrency exchanges.

What is KYC and ALM?

Billions of fiat currencies are becoming digital every day and vice versa, so governments and financial institutions feel an urgent need to monitor this movement. They believe that the absence of such control is fraught with disastrous consequences for the financial and territorial security of states. In fact, this is the real reason why the authorities are striving to limit the cryptocurrency market.

Despite different approaches, for any government the elimination of anonymity is the number one task. Accordingly, anonymous accounts are increasingly prohibited. For example, in South Korea, authorities have banned all anonymous crypto accounts.

What is KYC?

The KYC norm or “know your customer” refers to the process of identifying customers and verifying their identities. In fact, KYC is used by a company whenever someone tries to open an account on an exchanger or conduct a financial transaction. The KYC process usually include:

• Verification of identity and proof of citizenship;
• Checking the user for participation in illegal activities;
• Examination of the source of funds and destination;
• Search for suspicious transactions or evaluation of too large transaction volumes.

The goal of KYC is mainly to eliminate those who for some reason have no right to use the service. For example, minors, undocumented immigrants or people with a criminal record. Moreover, information from the collected database should be provided to law enforcement agencies to investigate crimes.

What is AML?

AML is similar to KYC, but focuses on the “fight against money laundering” when illegally obtained revenues are trying to transform into “clean” and “legitimate” assets. The AML process includes:

• Monitoring of transactions in excess of $ 10 thousand;
• The requirement to report certain types of transactions;
• Control of the movement of coins both abroad and within the country;
• Obtaining KYC information to confirm a person’s identity, and to verify if he was not involved in illegal activities.

These steps are designed to help identify and seize illegal means and prevent crime.

The need for verification on cryptocurrency exchanges

For financial regulators and governments, KYC and AML are crucial as a way to prevent crimes involving money laundering, theft, and other illegal activities. The use of these policies legalizes the crypto industry. That is why they are important.

When verification at the stock exchange is a mandatory element, regulators are confident of the legality of the transaction. Thus, the user confirms that he is a law-abiding citizen, and the state has no grounds for claims to him.

So, verification on the stock exchange provides:

• Customer safety, as they increase the reliability of the project / team and all participants in operations;
• Compliance with the exchange of cryptocurrency international standards that promote the mass adoption of cryptocurrency;
• Protecting projects, partly proving that projects are not a scam;
• Investment security – no one wants to participate in the financing of criminals or money launderers.

Speaking about the advantages of digital identification, it should be noted that thanks to it, billions of people have access to financial systems. Another thing is the developing countries, where more than 1.2 billion people do not have such an opportunity just because of the lack of customer identification and transaction authentication.

The combination of KYC and AML places a person at the center of the financial services industry and controls his personal data.

What data needs to be disclosed?

The main focus of KYC / AML procedures is identity verification and proof of residence. The user is required to provide accurate information, otherwise he will fall into the category of suspicious persons and will be subjected to a strict investigation process for fraud.

To pass verification on the exchange, the user will need to provide a passport, driver's license or other government ID. Identification by credit card, social network profile, student ID is not allowed if the identification document does not have a photo or has expired. In the case of investors, a check is also made on the state of equity (if a person declares, for example, about $ 1 million).   The user will be required to confirm the presence of assets.

It is important to observe the period of providing information about yourself, otherwise the check will be disqualified. The processing time can be delayed up to 4 weeks, starting from the end of the KYC application process.

Exchange verification procedure

To register a new account – for example, on the Binance cryptocurrency exchange – the user needs to perform the following steps:

• In the top menu of the website we will find the button "Registration" and click on it;
• In the form, enter the email address and password, which must include at least 8 characters, consisting of letters and numbers. Tick ​​off that you are of age;
• An email will be sent to your email with an informational link that you will need to click on, thus gaining access to your account;
• After confirming the captcha that you are not a bot, you will be warned about the possible risks on the platform. You need to confirm that you know them;
• After you open your account page;
• Further, before verifying the account, you will be asked to enable two-finger identification (2FA);
• Then fill in the form fields to identify your account, and the information must necessarily correspond to your ID. This is the beginning of KYC;
• In general, verification on the stock exchange takes 7-14 days. You will need to confirm your identity with a photo document – sometimes a photo can be requested via the device’s webcam. And to prove your place of residence, for example, by providing an invoice for utilities or a bank statement.

That's the whole procedure.

Pros and cons of KYC and ALM

There are not many entry points for the KYC regulatory framework in the overall blockchain structure. And trading crypto platforms offer a real opportunity for introducing KYC rules into the cryptocurrency space, making it easy to introduce a mandatory verification rule on the exchange.

However, the effectiveness of the KYC and ALM rules is directly dependent on the timely provision of suspicious information by service providers. Accordingly, state and financial regulators seek to increase their level of attention to the activities of stock exchanges. And far from always supervision is favorable for the activity of crypto exchangers .

Thus, in India, the bank accounts of some of the main cryptocurrency exchange platforms were frozen due to the lack of reports of illegal activities. Actually, it is not surprising that the authorities have begun to doubt.

According to estimates by the United Nations Office on Drugs and Crime, money laundering amounts are between 2% and 5% of global GDP each year, i.e. up to $ 2 trillion Part of the money goes to finance crimes. Just the rules of KYC and ALM, in theory, should prevent the flow of illegal funds into the legal monetary system from such crimes as corruption, market manipulation, trafficking in people, drugs and weapons.

Hardly anyone would argue. However, sometimes good intentions lead straight to hell. Excessive regulation conflicts with the values ​​of the blockchain technology – anonymity, freedom and uncontrolled movement of financial flows. And, oddly enough, KYC and ALM strengthens the old financial system, being quite an effective lever for influencing the cryptobranch. Moreover, due to the lack of a proper verification mechanism, entire countries are cut off from the global payment system.

“They (the governments) have created a comprehensive, global surveillance device.” A system that keeps billions in poverty, kills innovation and gives the banking system a reason to block competition , ”is the opinion of the head of Epiphyte Edona Yago.

So, the crypto community rightly sees a direct threat to its fundamentals. An example of this is the popular stock exchange service ShapeShift, which for a long time resisted the introduction of KYC, eventually lost in September last year, and as a result, the trading volume dropped significantly as some of its customers switched to less strict platforms.

In addition, some platforms collect and store such volumes of data about users, which are quite comparable with those that are available to the special services. Not to mention those who use the pretext of fulfilling the KYC and ALM standards to collect comprehensive personal information. A recent example is HitBTC, which many complain about just about abusing KYC and ALM. There are cases when HitBTC froze coins, even if users provided all the documents required for identification.

“In the report on the source of funds, describe all the actions that you performed with them before sending them to HitBTC – for example, their acquisition, exchange, transfer from one address to another. Please show the entire chain of event data in chronology. Please attach screenshots to confirm your every step , ”was written in an additional request to the user from HitBTC.

Not surprisingly, the request for additional information by the exchange, traders regard as an attempt to keep their funds. After all, it is not known whether the excessive HitBTC request complies with the KYC rules?

⚠️?Looks like @hitbtc have full scammer, and are stealing balances of users (including me) .?⚠️

There is no idea that you can use it.

(And as always, keep as little on exchanges as possible!)

– Luke Dashjr (@LukeDashjr) March 28, 2019

If we talk about the pros, then, of course, KYC and AML increase confidence in cryptocurrencies at both the individual and institutional levels. In many cases, the KYC procedure helps to avoid financial theft, and the average customer also gets a number of benefits through this policy.

For example, suspicious transactions are suspended and the user after the identification procedure receives his coins back. In any case, criminals will not be able to confirm their right to stolen tokens.

Most likely, in the future there will be even stricter rules for passing verification on the stock exchange than KYC and ALM, although so far there are still stock exchanges without verification. Despite the long-term goal of the crypto industry, to become an alternative to traditional finance, it has to play according to the rules set by governments and regulators. The question is whether a consensus will be found and whether the crypto-industry will be able to preserve its value bases under such pressure? Far from a fact.

Publication date 07/24/2019
Share this material on social networks and leave your opinion in the comments below.